APPA's Competitive Market Plan - American Public Power Association

will be especially pronounced in RTOs with restructured retail markets. 63
APPA does not expect that increased reliance on longer-term bilateral
contracts and owned generation will immediately produce lower prices. It
is, however, likely to produce more stable and reasonable prices in the
long run. Shorter-term power supply contracts of three years or less, such
as those procured to provide SOS, frequently include generation prices
above the spot prices set in RTO markets, in part due to the inclusion of
risk premiums. 64 Diversified LSE resource portfolios that include longerterm
contracts of 10, 20 or more years may still entail some risk premium
because suppliers would be absorbing the risk of reduced demand. But
such premiums are likely to be mitigated by APPA’s proposed price
formation mechanism for the optimization market. This market structure
should better discipline spot prices, which in turn should discipline
bilateral contract prices formed through responses to LSE requests for
proposals, where suppliers of generation and demand response must
compete directly with each other, as well as with the prospect of LSEowned
projects. Any risk premiums that suppliers do require are likely to
be exceeded by the benefits of greater price stability.
There is not sufficient data to ascertain the current status of bilateral
contracting in RTO regions. For example, PJM’s State of the Market
reports provide data on the percentage of power purchased through
bilateral contracts, self-supply and spot markets. In the 2010 State of the
Market Report, these data show that 11.8 percent of the power purchased
in the real-time and 4.9 percent in the day-ahead market was sold through
bilateral contracts, a decrease of 1.1 percentage points from the prior year
for the real-time market, and no change in the day-ahead market. 65 But
PJM does not break down these data according to the length of the
contract or the pricing terms. Theoretically, a one-week agreement to sell
power at a price indexed directly to prices set in PJM’s spot market would
be counted as a bilateral contract.
64
Testimony of Kenneth Rose, Ph.D., Independent Consultant, before the Pennsylvania Public
Utility Commission, November 6, 2008, http://www.puc.state.pa.us/electric/pdf/EnBanc-
WEM/Ttmy-Kenneth_Rose110608.pdf , p. 8 – 11. A presentation by Pennsylvania PUC Chairman
James H. Cawley noted that PECO’s default price “includes a risk premium to account
for future load level uncertainty.” Philadelphia Business Journal, 2010 Energy Summit, October
28, 2010, http://www.puc.state.pa.us/electric/pdf/PPT-PBJ_Presentation102810-
Cawley.pdf
65
2010 State of the Market Report for PJM, Section 2, Monitoring Analytics, March 20, 2011, p.
106-107, http://www.monitoringanalytics.com/reports/PJM_State_of_the_Market/2010/2010-
som-pjm-volume2-sec2.pdf. These data are reported at the level of the parent company such
that bilateral sales between generation-owing and load- serving regulated utility affiliates would
be reported as self-supply and not as a bilateral contract. In the State of the Market reports for
2008 and earlier, these data were also reported for the billing company which reported that
about 96 percent of real-time sales were made through bilateral contracts.
24 APPA’s Competitive Market Plan: 2011 Update www.PublicPower.org